China’s economy is pumped to perfection ahead of Communist enclave

Chinese economic planners can take a bow: the latest figures show the Chinese economy is in fine shape, with its manufacturing sector humming along, ahead of this month’s once-every-five years leadership reshuffle.

That’s where Chinese President Xi Jinping is expected to further consolidate his grip on power.

The political manoeuvres, of course, are already well under way. A week ago, a once-rising Chinese political star – Sun Zhengcai, the former top official in the inland megacity of Chongqing – was expelled from the ruling Communist Party and handed over to prosecutors to face corruption charges.

Sun is the first sitting member of the party’s politburo – the 25 most politically powerful people in the country – to be caught up in Xi’s anti-corruption campaign, and analysts said the timing of his downfall was designed to remind other Chinese officials of the dangers of showing any signs of disloyalty.

Meanwhile, Beijing will have been pleased as the country’s purchasing manufacturing index – which largely reflects the health of China’s larger companies and state-owned firms – climbed to a five-year high of 52.4 in September, up from 51.7 a month earlier.

September’s robust manufacturing performance has erased fears that the world’s largest economy could falter ahead of the pivotal Communist Party meeting.

Economists are predicting that the country’s GDP for the third quarter will again easily beat the official target of 6.5 per cent.

Evident strength

The strength of China’s manufacturers is already evident in commodity prices. According to HSBC economists, commodity prices have risen for three months in a row, with their proxy for the IMF commodity price index recording a 3 per cent gain in September, following the 2 per cent rises recorded in both August and July.

In their latest note, HSBC economists point out that the oil price recorded the strongest gain – with the average price up 6 per cent in September from August.

At the same time, they say, “coal prices remain firm, with the average thermal coal price up 2 per cent in September”.

And September saw metal prices consolidate the strong gains they recorded the previous month, with zinc up a further 5 per cent, nickel and aluminium up 3 per cent, and copper up 1 per cent.

The big exception was iron ore, which saw prices drop 7 per cent month-on-month, although the HSBC economists note that iron ore prices “remain 24 per cent higher than a year ago”.

But economists point out that although big Chinese manufacturers appear to be thriving, there are signs that small, privately owned firms – a key source of jobs and income growth – are struggling.

According to the Caixin China manufacturing PMI – which more closely tracks smaller private companies – activity in September fell to 51.0 from 51.6 the previous month.

Small companies bear brunt

Analysts say that smaller, privately owned companies have borne the brunt of some of Beijing’s tinkering with the economy in the lead-up to the October party congress.

For instance, Beijing has imposed stricter environmental controls ahead of the meeting, with many factories in northern China expected to suspend production altogether before the event. This crackdown on pollution hits smaller manufacturers, who usually have poorer emission controls.

Similarly, private companies have been most heavily affected by Beijing’s forced factory closures this year designed to reduce “overcapacity” in industries such as steel and aluminium.

But it’s been Beijing’s moves to tighten prudential controls – in order to bolster financial stability and to cool the overheated property sector – that have created the biggest headaches for these firms.

Chinese regulators have made it more difficult for the country’s banks to raise funds in wholesale money markets, and to channel this money –-through off-balance-sheet vehicles – to riskier privately owned borrowers.

Access to finance

Beijing has already recognised the difficulties that small businesses are having in accessing finance.

On the weekend, China’s central bank, the People’s Bank of China, said it would reduce the level of reserves that banks were required to hold with the central bank, provided they met certain criteria on lending to small and private businesses.

But analysts warn that the cut, expected to inject an extra 300 billion to 400 billion yuan ($60 billion to $80 billion) into the banking system in 2018, will do little to lower borrowing costs or improve the availability of credit for privately owned Chinese firms, and this is likely to weigh on future investment and growth.